VPPs are transforming energy markets in the U.S.

Amid the increasing frequency of extreme weather events across the United States, recent developments in virtual power plants (VPPs) are showcasing how grid operators, utilities and retailers have the capacity to leverage connected, distributed renewable energy resources to address critical energy challenges. Leading the charge, Texas and California have emerged as excellent examples of how VPP participation is transforming electricity markets.

Texas most recently experienced severe power outages due to Hurricane Beryl in July, which left almost three million individuals without power in the state. The restoration of power took many days to complete, leaving thousands of customers without power for extensive periods — for some, extending beyond a week.

This event came on the heels of the tornados that wreaked havoc in areas of North Texas and beyond, impacting about 600,000 electricity consumers, with over 1,070,000 affected at the peak due to inclement weather in late May. Many residents were without power for days as restoration efforts were arduous to complete. These events are part of a recurring trend of power outages in the state over the past two decades, primarily attributed to climate change which is exacerbated by an aging grid system.

ERCOT’s Aggregated Distributed Energy Resource pilot

Simultaneously, this spring, the Electricity Reliability Council of Texas (ERCOT) announced its New Era of Planning, garnering attention for increased load growth expectations. The report stated that they expect an additional 40,000 MW of energy demand. This level of load growth is equivalent to an additional eight million homes being added to the grid.

In January 2024, solar energy generation in ERCOT hit a record 36%, highlighting Texas’ substantial renewable energy capacity. This growth enables opportunities for distributed energy resources (DERs) like small generators, solar panels, EVs and controllable loads, which consume and generate energy locally to benefit both homeowners and the grid.

Both ERCOT and Retail Electric Providers (REPs) operating in ERCOT’s deregulated market are embracing DERs. In 2022, ERCOT announced the Aggregated Distributed Energy Resource (ADER) pilot program, paving the way for behind-the-meter resources to provide energy and ancillary services in ERCOT’s wholesale market. Ultimately, ADER treats behind-the-meter assets similarly to large, centralized power plants, providing an opportunity for DERs to directly secure and stabilize the grid during times of stress, constraints or high prices.

Enrollment in this program is facilitated by REPs that play a consumer-facing role in the ERCOT market and have leeway in designing their own rates to compete for resident business. Texas retailers serve nearly eight million premises with the power to choose who supplies their power. With the ADER framework in place, REPs are building solar and battery-friendly rate plans, providing homeowners with an easy-to-digest value proposition for their participation in ADER and for helping their REP avoid ERCOT’s often volatile wholesale energy prices.

These developments have certainly increased residential battery deployments in the state; however, challenges remain in scaling ADER. This January, ERCOT’s ADER task force highlighted the need to improve telemetry and compliance metrics to reduce the technical burden on DER participants. Since the VPP value in Texas depends on future energy market prices, crafting compelling financial offers that ensure homeowner savings is essential to encourage the purchase of batteries.

California’s Demand-Side Grid Support Program

California leads all other states in total annual solar production. However, recent changes in electricity rate structures have created new challenges to the viability of rooftop solar. The rise of new VPP programs have been introduced to help create opportunities for residential batteries to increase savings for homeowners.

At the crux of these changes is a focus on timing rather than amount of energy a solar system can produce. In 2023, grid operators introduced a new net billing tariff, NEM 3.0, which largely discourages solar exports during peak solar production hours. This economic model has made batteries central to the rooftop solar financial value proposition, increasing battery attach rates in California and driving national solar + storage deployments up 46% year-over-year.

Complementing this shift, around the same time, California’s Demand Side Grid Support (DSGS) program was established. DSGS pays behind-the-meter battery owners who opt in to support the grid during times of stress and high wholesale prices. Through connected technology platforms, participants’ residential batteries respond directly to day-ahead market prices, as solar production ramps down, home load increases, and the grid needs energy most. This program’s straightforward design, $300 million initial budget allocation and wide eligibility net have resulted in strong participation rates, with tens of thousands of home battery systems expected to participate in 2024’s summer program season.

However, NEM 3.0’s rigid tariff structure imposes strict requirements on battery operations, which can conflict with participation in DSGS. As of June 2024, proposed state budget cuts could slash DSGS funding by up to 70%, creating uncertainty for operators, system owners and financiers. Despite this, DSGS is critical for California’s electric grid, net-zero goals and for DER deployments. To ensure a positive impact of the DSGS fleet in addition to the future of VPPs, lawmakers should prioritize funding for these types of programs.

With the increasing climate urgency and emphasis on sustainable and reliable energy sources, VPPs are a promising new frontier. VPPs can provide an economic and stable solution for grid decarbonization and modernization — representing a significant shift in how we generate, distribute and consume electricity.